10 Things You Should Know About Mutual Funds

What Mutual Funds Are, How Mutual Funds Work, and Much More

Mutual funds are one of the most popular ways for new investors to build wealth. Whether you own them through your retirement plans, such as a 401(k) or IRA, or you buy them directly or through a brokerage account, this guide to mutual fund investing is designed to help you understand what they are, how they work, and things you may want to consider.

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Here's a behind-the-scenes look at the makeup of a fund, which will give you a much better idea of what happens once you write a check to start investing. For beginners, this is an excellent look at how mutual funds are structured.

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Once you are ready to begin investing in mutual funds, you have to go about buying your mutual fund shares. There are three popular ways this is done in the United States. This overview will help you understand each of them, and some of the advantages certain methods have over others.

04

When you buy your first mutual fund, you may encounter something known as a sales load. There are front-end loads, back-end loads, deferred loads, and declining loads. That may sound complicated, but it is really important you understand what these terms mean because buying the wrong type of mutual fund can take thousands, or even tens of thousands, of dollars directly out of your pocket.

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Many professionals believe that low-cost index funds are a better investment choice for those who want to grow their wealth without a lot of hassle. How are index funds different? Should you consider investing in them instead of actively managed mutual funds? Here are some thoughts that you might want to consider.

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How do you pick the best mutual funds? This step-by-step guide illustrates some of the things to think about and look for when building a mutual fund portfolio. It includes considering specific markets like energy. It should be useful as you make your way through what can seem like an endless list of potential fund investments.

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There is a hidden mutual fund tax that could cause you to owe massive amounts of money to the IRS even if you lose money investing in a mutual fund. Most new investors don't know how it works, or even how to spot this potential danger. Don't even consider mutual fund investing until you've learned the cause of potential mutual fund tax problems.

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While it may seem like a good idea to only buy shares of mutual funds that have good past performance, that's not always the case. Mutual funds are a unique type of investment. For example, portfolio managers change even though the fund name remains the same. If someone new is managing your money, you may not even realize it. Likewise, fund assets grow, making it more difficult to put money to work as the universe of potential investments shrinks.

09

Mutual funds aren't just for investing in stocks. A common question for beginners is whether new investors should own bonds or invest in a bond fund, which is a special type of mutual fund that owns bonds and other fixed-income investments.

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You may have heard a lot about ETFs, or read about them in the press, especially comparing them to traditional mutual funds. Exchange traded funds do have a lot of benefits, but there are also some drawbacks you need to know about before you make the switch.